MNI INTERVIEW: Excess Retirements Peak, Set To Recede-Fed Econ

Pandemic-era retirements beyond what demographic trends would expect have peaked and could normalize in the next 18 months, potentially helping to cool a booming labor market that has defied the Fed's efforts to slow growth, Federal Reserve Bank of St. Louis senior economist Miguel Faria-e-Castro told MNI.

At its peak in December, there were 2.95 million "excess retirees" and an estimated 3.73 million "missing workers" in the U.S. labor force, meaning excess retirements potentially accounted for some 80% of missing workers, Faria-e-Castro said, cautioning that this back-of-the-envelope calculation has not accounted for immigration flows or death rates.

Excess retirements this year through April have fallen at a pace on par with the way they shot up in 2020, he said.

"At the current rate of decline, it would take about 17 to 18 months for excess retirements to return to zero," he said. That could be even faster if the economy experiences a mild recession, as many analysts expect. "The trend seems to be going downwards since December 2022. So it is possible that these excess retirements may be disappearing."

COVID RETIREMENTS CONTINUE

Millions of American workers retired early during Covid or declined to rejoin the workforce to avoid falling ill, care for loved ones or because the value of their pensions and retirements accounts had risen, expanding their net worth.

That trend has continued even now beyond what economists expect from the surge of baby boomer retirements, Faria-e-Castro said. As of April, the latest month of data in his analysis, there were roughly 2.4 million excess retirees in the U.S. and the labor force participation rate remained 0.7pp below its February 2020 level.

"If we assume that the current labor market tightness is partly caused by a drop in participation -- in practice I believe this is the case, but there are other factors playing important roles -- then excess retirements probably had a significant contribution," he said.

Even without excess retirements, the U.S. population and labor force continue to age and the share of retirees is set to keep increasing, putting pressure on labor supply.

"In the absence of other types of inflows of workers, labor markets may remain tighter than before," Faria-e-Castro said.

RECESSION DYNAMICS

With a very strong labor market, people tend to return to work, and this may be important even for older workers, Faria-e-Castro said. The passing of the pandemic also means less risk of severe illness while the boom in stocks and housing prices has slowed, all of which may induce people to work more. (See: MNI INTERVIEW: US Sentiment Turns Up On Disinflation - UMich)

A recession could accelerate the trend this year and next. The Fed's latest economic projections show the unemployment rate rising to 4.5% by the end of next year as growth slows. Private forecasters surveyed by the Philadelphia Fed see a 40% risk of a contraction in GDP this year.

"People tend to work more when their wealth is worth less, which tends to happen in recessions," Faria-e-Castro said. "Research has shown that the labor force participation was higher during the Great Recession than what it would have otherwise been in the absence of a recession due to this effect."